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On June 23, 2016, the Centers for Medicare and Medicaid Services (CMS) published a long-awaited final rule making major changes in the way Medicare will pay for clinical diagnostic laboratory tests (CDLTs). The changes were mandated by the Protecting Access to Medicare Act of 2014 (PAMA), which requires that the Medicare payment rate for most CDLTs equal the weighted median of private payor rates for the test. The final rule sets out the details of this payment policy—including which entities must report payment data, when they must do so, and which data must be reported—and sets an effective date of January 1, 2018, for the shift in payment rates. CMS estimates that the final rule will result in a reduction of approximately $390 million, or 5.6 percent, in Medicare spending on clinical laboratory tests in federal fiscal year 2018 and nearly $4 billion over the course of 10 years.

Background

The Medicare program pays for CDLTs according to the Clinical Laboratory Fee Schedule (CLFS). The CLFS was established in 1984 and since then has only been updated to add newly available tests or to make routine statutory updates, such as inflation increases and across-the-board productivity decreases. Over time, the CLFS has grown from approximately 400 tests to over 1,300 tests. In some cases, tests have become more automated and cheaper to perform, with less need for laboratory technician labor. In other cases, more complex and expensive tests have been developed, and existing crosswalking and gap-filling processes may be insufficient to make sound payment policy decisions.

Congress addressed these issues in PAMA, which was enacted April 1, 2014. The law overhauls the CLFS payment methodology and imposes a market-based reimbursement system. PAMA provides that, in general, payment for a CDLT will be equal to the weighted median of private payor rates for the test, based on data reported by certain laboratories during a specified collection period. PAMA also requires a similar rate adjustment and reporting requirement for advanced diagnostic laboratory tests (ADLTs).

CMS released a proposed rule to implement certain portions of PAMA on October 1, 2015. The proposed rule drew sharp criticism from industry stakeholders and generated 1,300 public comments. Among other things, commenters criticized the proposed timeline for implementation. Although the statute includes a January 1, 2017, effective date, this timeline was based on the assumption that CMS would release a final rule to implement PAMA by June 30, 2015. Commenters asserted that laboratories would need additional time to prepare for the law’s reporting requirements and should not be penalized for CMS’s delay in proposing and finalizing regulations. In addition, commenters expressed concern regarding CMS’s proposal to define “applicable laboratories”— i.e., laboratories subject to the law’s reporting requirements—in a way that would exclude a substantial portion of independent laboratories and the vast majority of physician office laboratories and hospital laboratories, thereby removing their payment data from the dataset used to set future rates.

Key Provisions of the Final Rule

Payment Methodology

As noted above, PAMA provides that payment for a CDLT generally will equal the weighted median of private payor rates for the test for the most recent data collection period. The statute also includes a limit in the reduction in payment amounts that may result from implementation of this payment methodology over the first six years. Specifically, the payment amount for a given test may not decrease more than 10 percent as compared to the previous year for the first three years after implementation of the new system (2018 through 2020) and may not decrease more than 15 percent per year for the next three years (2021 through 2023). The final rule provides several examples of how payment rates will be calculated. The bulk of the final rule, however, focuses on the law’s data reporting requirements and the timeline for implementation.

Implementation Schedule

The final rule provides for an implementation date of January 1, 2018, for the private payor rate-based fee schedule required by PAMA. CMS also sets out the implementation schedule for the CDLT reporting requirement in the final rule. Reporting entities must collect the relevant data for the period from January 1 to June 30, 2016. These entities will report that data between January 1 and March 31, 2017. CMS will then calculate the new CLFS for publication in early November 2017 and implementation on January 1, 2018. This calendar of data collection, reporting and implementation of a new schedule will be repeated every three years for CDLTs and each year for certain new ADLTs. Entities that fail to report will be subject to civil monetary penalties for each omission, misrepresentation, or failure to report regarding their private payor reimbursement.

Applicable Laboratories

Only those laboratories that fall within the ambit of the term “applicable laboratory” are required to report their private payor rates. Under the final rule, an applicable laboratory is a laboratory, as defined by reference to the regulations implementing the Clinical Laboratory Improvements Amendments (CLIA), that bills Medicare Part B under its own National Provider Identifier (NPI) and receives more than 50 percent of its total Medicare revenues during a single six-month data collection period from services paid under the CLFS and the Physician Fee Schedule.

The identification of applicable laboratories by reference to their NPIs, rather than their Taxpayer Identification Numbers (TINs), is a departure from the proposed rule. This change will have the effect of including some hospital outreach laboratories in the reporting and rate-setting process that might have otherwise not been included. Notwithstanding the use of the NPIs to identify applicable laboratories, the final rule places the obligation to report on the TIN-level entity (referred to as the “reporting entity”). Thus, in the case of a single legal entity with multiple NPIs for various operations, the entity will be required to report applicable information for all of its component NPI-level operations that meet the definition of applicable laboratory.

The final rule also imposes a “low expenditure threshold” to minimize the reporting burden for laboratories that receive a relatively small amount of revenues under the CLFS. Under the final rule, laboratories that receive less than $12,500 under the CLFS during a data collection period will not be deemed “applicable laboratories” and therefore will not be required to report. CMS estimates that this expenditure threshold will exclude approximately 95 percent of physician office laboratories and approximately 55 percent of independent laboratories from having to report applicable information. Yet the agency estimates that those laboratories that will be required to report account for approximately 92 percent of CLFS spending on physician office laboratories and 99 percent of CLFS spending on independent laboratories.

Applicable Information

The data that applicable laboratories must report is referred to as “applicable information.” Each applicable laboratory must report the following for each test on the CLFS that it performs: (1) the payment rate that was paid by each private payor for a test during the data collection period, and (2) the volume of such tests for each such payor during the data collection period. Applicable information does not include data regarding laboratory tests for which payment is made on a capitated basis, because there is no way to determine what portion of the capitated payment corresponds with the specific test.

The “private payor rate” for a test includes all discounts, rebates, coupons, and other price concessions given by the laboratory to the private payor. For example, if a laboratory would typically charge $100 for a particular test but has given the private payor a discount of $20, the reportable private payor rate is $80. These payor discounts are distinct from those a laboratory provides directly to a patient through charity care or other programs, which CMS excludes from the rate. As in its proposed rule, CMS includes all patient cost-sharing amounts in the private payor rate to reflect the fact that Medicare generally does not require its beneficiaries to pay a deductible or coinsurance on CLFS services. Thus, if a laboratory charges a private payor $80 for a test, but the private payor requires the patient to pay 15 percent of the $80 cost as coinsurance—meaning that the private payor in fact paid only $68—the reportable private payor rate is the full $80.

The final rule requires that an applicable laboratory report not only the private payor rate for a test, but the associated volume of tests paid at each rate. The final rule states that only tests for which final payment is made during the data collection period must be reported; tests for which the payment amount is in dispute or coverage has been rejected during the data collection period are not included as applicable information.

As a practical matter, CMS recognizes the need to identify each particular test for which private payor information is being reported. As CLFS tests are identified by their HCPCS code, the final rule requires applicable laboratories to report a HCPCS code for each test. A test for which a specific HCPCS code cannot be determined is not included in the definition of applicable information.

Advanced Diagnostic Laboratory Tests (ADLTs)

PAMA applies different reporting and payment requirements to ADLTs than to other CDLTs. The statute defines an ADLT as a CDLT offered and furnished by a single laboratory, not sold for use by other entities, and which is either: (1) a test to analyze multiple biomarkers of DNA, RNA, or certain proteins; (2) a test cleared or approved by the Food and Drug Administration; or (3) a test that meets other federally established criteria. However, Congress left the specific regulatory definition of several of the key statutory terms to CMS to establish during the rulemaking process.

CMS interprets PAMA’s ADLT provisions as an attempt to award special payment status to “the one laboratory that is expending all the resources for a given test.” This approach initially led the agency to define ADLTs narrowly in its proposed rule. After extensive stakeholder input during the public comment period, however, CMS has altered the final rule to be more consistent with common industry practice. For example, the “single laboratory” that offers and furnishes a test will not have to operate under a single CLIA certificate—and therefore a single physical location—but will rather mean a single-site laboratory or entities which own several laboratories that collectively design, offer, and sell a particular test. CMS also opted to include complex protein-only tests in the definition of ADLTs, and to maintain its requirement that an ADLT provide new clinical diagnostic information unavailable from other tests.

Payment data regarding established ADLTs will be collected and new payment rates implemented on an annual basis. ADLTs for which payment has not been made under the CLFS before January 1, 2018, will initially be reimbursed at their actual list charge for the first three quarters of the relevant calendar year. After the three-quarter period, a new ADLT will be reimbursed according to its weighted median private payor rate. If, once the initial period is over, CMS determines that the actual list charge during the initial payment period is more than 130 percent of the later-determined market-based rate, CMS is entitled to recoup the excess (over the 130 percent threshold, not the entire amount in excess of the market-based rate, as CMS initially proposed).

* * *

In view of the proposed rule, CMS’s final rule could be fairly characterized as “not as bad as it could have been” news. Laboratories and others paid under the CLFS will welcome the delayed implementation date, the shortened data collection period, and the less stringent guidelines for tests to be reimbursed as ADLTs. Nonetheless, the final rule is expected to result in a significant decrease in payment. As noted above, CMS estimates that the final rule will reduce Medicare spending on clinical laboratory tests by $390 million in fiscal year 2018, and by nearly $4 billion over the course of 10 years.

The final rule appears at 81 Fed. Reg. 41036 (June 23, 2016), and is available here.